In 2010, in Jones v. Harris Associates L.P., the U.S. Supreme Court adopted the Second Circuit’s long-standing Gartenberg standard for cases brought under Section 36(b) of the 1940 Act. As part of its decision in Jones, the Supreme Court reversed a 2008 decision of the Seventh Circuit (which had applied a different standard), and remanded the case so that the Seventh Circuit could evaluate whether the district court had correctly decided to dismiss the case under the Jones/Gartenberg standard. On August 6, 2015, the Seventh Circuit issued its decision, affirming the dismissal of the case on summary judgment by the district court.
According to the Seventh Circuit, the district court’s review of the record on summary judgment focused on the lack of material dispute about four propositions: (i) the fees charged by the adviser were in line with those charged by advisers for other comparable funds, “which tells us the bargaining range”; (ii) the adviser provided accurate information to the funds’ boards, whose disinterested members approved the fees; (iii) the fee schedules contained breakpoints; and (iv) the fees could not be called disproportionate in relation to the value of the adviser’s work, as the funds’ returns (net of fees) were the same as, if not better than, the returns of comparable funds advised by third parties. With respect to a comparison between fund fees and fees charged to institutional clients, the Seventh Circuit noted that, in Jones, the Supreme Court had not disagreed with the Seventh Circuit’s 2008 approach. Differences in fees charged to other types of clients do not create a material issue of fact when the plaintiffs had not proffered evidence showing that (a) the adviser’s services provided to other types of clients were the same as services provided by the adviser to the mutual funds in question or (b) that the adviser incurred the same costs when serving other types of clients.